Drafting Corporate Bylaws
(Page 2 of 2 of How to Form a Corporation )
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Bylaws are the internal rules that govern the day-to-day operations of a corporation, such as when and where the corporation will hold directors' and shareholders' meetings and what the shareholders' and directors' voting requirements are. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation's directors at their first board meeting.
Plan for Ownership Changes With a Shareholders' Agreement
A shareholders' agreement helps owners of a small corporation decide and plan for what will happen when one owner retires, dies, becomes disabled, or leaves the corporation to pursue other interests. For more information, see Nolo's article Plan Ahead for Changes in Corporate Ownership.
Holding a First Meeting of the Board of Directors
After the owners appoint directors, file articles of incorporation, and create bylaws, the directors must hold an initial board meeting to handle a few corporate formalities and make some important decisions. At this meeting, directors usually:
- set the corporation's fiscal or accounting year
- appoint corporate officers
- adopt the corporate bylaws
- authorize the issuance of shares of stock, and
- adopt an official stock certificate form and corporate seal.
Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. (For information on whether your corporation should adopt S corporation status, see S Corporation Facts.)
You should not do business as a corporation until you have issued shares of stock. Issuing shares formally divides up ownership interests in the business. It is also a requirement of doing business as a corporation -- and you must act like a corporation at all times to qualify for the legal protections offered by corporate status.
Issuing stock can be complicated; it must be accomplished in accordance with securities laws. This means that large corporations must register their stock offerings with the federal Securities and Exchange Commission (SEC) and the state securities agency. Registration takes time and typically involves extra legal and accounting fees.
Exemptions to Securities Registration
Fortunately, most small corporations qualify for exemptions from securities registration. For example, SEC rules do not require a corporation to register a "private offering" -- that is, a non-advertised sale to a limited number of people (generally 35 or fewer) or to those who can reasonably be expected to take care of themselves because of their net worth or income earning capacity. And most states have enacted their own versions of this SEC exemption. In short, if your corporation will issue shares to a small number of people (generally ten or less) who will actively participate in running the business, it will certainly qualify for exemptions to securities registration.
Passive Shareholder Rules
If you're selling shares of stock to passive investors (people who won't be involved in running the company), complying with state and federal securities laws gets complicated. Get help from a good small business lawyer.
For more information about federal securities laws and exemptions, visit the SEC website at www.sec.gov. For more information on your state's exemption rules, go to your secretary of state's website. (You can find links to every state's site at the website of the National Association of Secretaries of State, www.nass.org.)
Issuing the Shares
When you're ready to issue the actual shares, you'll need to document the following:
- the names of the initial shareholders
- the number of shares each shareholder will buy, and
- how each shareholder will pay for his or her shares.
Finally, you'll prepare and issue the stock certificates. In some states you may also have to file a "notice of stock transaction" or similar form with your state corporations office.
Obtaining Licenses and Permits
After you've filed your articles, created your bylaws, held your first directors' meeting, and issued stock, you're almost ready to go. But you still need to obtain the required licenses and permits that anyone needs to start a new business, such as a business license (also known as a tax registration certificate). You may also have to obtain an employer identification number from the IRS, a seller's permit from your state, or a zoning permit from your local planning board. For more information, see the Licenses & Permits for Your Business area of Nolo's website.
If you're ready to incorporate your business, you can use Nolo's Online Corporation to create your corporation online or the following books which include all the forms and information you need:
- Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo), or
- How to Form Your Own California Corporation, by Anthony Mancuso (Nolo).
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